Guernsey: International Law

Guernsey's joy at being excluded from the FATF listing in the spring of 2000 was short-lived as it was later included on the OECD blacklist. In response, Guernsey joined Jersey and the Isle of Man in taking the stance that they would not reform their tax regimes unless other countries with similar fiscal arrangements followed suit.

They stated that they needed to clearly define the goal posts before the islands commited themselves to anything. Laurie Morgan, Chief Minister of Guernsey at the time, explained that:

'We have agreed to continue our dialogue with the OECD and to keep each other informed to present a fairly united front. But our message is that we will not be pushed around by international organisations telling us how to tax our population and run our country.'

In December 2000 a consultation document was published, entitled Overriding Principles For A Revised Know Your Customer Framework, which was essentially a joint initiative from financial regulators in Guernsey, Jersey and the Isle of Man to bolster their existing anti-money laundering regulations.

Guernsey was in fact already working on a new fiduciary law which came into effect on 1st April 2001: The Regulation of Fiduciaries, Administration Businesses and Company Directors (Bailiwick of Guernsey) Law 2000 - otherwise known as the 'Fiduciary Law'.

An update in the Guernsey guidance notes on the prevention of money laundering was published in August 2001, and The States of Guernsey additionally amended the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, 1999.

The GFSC received 179 applications for a Full Fiduciary Licence (covering in excess of 800 business entities) before the deadline of 31 May, 2001.

From 1 June, 2001, it was a criminal offence for anyone not licensed by the Commission to provide non-exempted regulated activities (such as trust and company management) within the Bailiwick or to use a Guernsey or Alderney company for such purpose anywhere in the world.

After the events of 11 September, Talmai Morgan, Guernsey's Director of Fiduciary Services and Enforcement warned that Guernsey financial institutions needed to learn to say no to suspect business, in order to avoid tarnishing the jurisdiction's reputation by becoming implicated in tax evasion, money laundering, and other dodgy dealings.

Later in the year, Guernsey's Advisory and Finance Committee released a statement confirming the State's intention to enhance its anti-terrorism legislation to bring the Island into line with the Regulations and Codes of Practice regime in force in the United Kingdom, although Guernsey in fact already had in place comprehensive legislation governing counter-terrorism measures.

In October 2002, Guernsey and the United States signed an agreement designed to provide for the exchange of information on money laundering and tax evasion activities. Laurie Morgan flew to Washington to sign the treaty on behalf of the Guernsey government. He observed that the signing of the agreement represented a natural progression of the close relationship between the US and the island, explaining that:

'Guernsey has a long-standing commitment to international cooperation and best practice. We believe strongly in the need to encourage the development and enforcement of international standards. Like the Treasury Secretary, I also hope that other jurisdictions in Europe will follow our example in reaching agreements on exchange of information with the US.'

Then US Treasury Secretary, Paul O'Neill, who signed the agreement on behalf of the American authorities stated that: 'This new agreement will formalise and streamline our current co-operation in criminal tax matters and will allow exchange of information on specific requests in civil tax matters as well.'

Guernsey was eventually removed from the OECD's blacklist in February 2002.

Returning to money laundering matters, in June 2002, Guernsey's updated anti-money laundering laws came into effect. Peter Neville explained that the updated laws now took account of FATF and EU recommendations made in the wake of the September 11 attacks.

The previous anti-money laundering legislation had not covered foreign exchange services such as those operated by banks, independent bureaux de change, money brokers, credit unions, or advance lenders, according to the report. Despite the fact that there has been little evidence that terrorist groups have laundered money through the Island in this way, the aforementioned services will be covered by the new regulations from the end of June.

2003, the year in which the Guernsey authorities had first committed to a withholding tax regime (see below), also saw the introduction of a revised set of 40 FATF Guidelines on anti-money laundering. Peter Neville said that major structural changes to the jurisdiction's regulatory regime would not be required as a result. According to Neville, Guernsey already had a perfectly adequate set of regulations in place.

"For example, the Basel requirements for customer due diligence on introduced business are undoubtedly tougher than the new FATF standards," Mr Neville observed. "Guernsey is very prepared to meet international standards that apply to everyone, but we will not apply requirements that are higher and which unfairly penalise our industry," he added.

However the FSC was still busy improving its legislation, announcing in July that proposed amendments to the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, and to the Guidance Notes on the Prevention of Money Laundering and Countering the Financing of Terrorism would require financial services businesses to:

• have wire transfer procedures (Regulation 5) as prescribed in the Guidance Notes;
• ensure that internal reports are made in writing to the Reporting Officer and that these reports are retained;
• pay special attention to all complex, unusual large transactions or unusual patterns of transactions, and to transactions with persons that do not have adequate systems in place to prevent or deter money laundering or terrorist financing;
• ensure that staff (and not just key staff) receive suitable training which should also include training in new developments, trends and techniques of money laundering and the financing of terrorism;
• ensure staff are suitable, adequately trained and properly supervised;
• ensure that, where there are foreign branches and subsidiaries of a financial services business whose parent entity is based in the Bailiwick of Guernsey, the provisions of Regulation 10 are followed; and
• maintain compliance and audit arrangements in accordance with Regulation 11.

According to the GFSC, the majority of the changes were designed to bring the jurisdiction into compliance with standards set by the Financial Action Task Force and the International Monetary Fund, following the latter's recent assessment of the Island.

In December, 2003, in response to concerns raised by the jurisdiction’s financial services sector, the FSC issued a clarification for financial institutions in respect of the Forty Recommendations of the Financial Action Task Force (FATF) and how they relate to introduced business.

In July, 2004, the FSC issued a statement on anti-money laundering standards for existing customers following the issue of the revised Recommendations by the Financial Action Task Force in 2003.

The statement required financial services businesses to assess the risk of each business relationship and to make sure that they have customer due diligence information appropriate to the level of risk. It allows businesses in the financial services sector to consider whether simplified or reduced information is appropriate for low risk businesses and lower risk customers. This could mean for example, locally resident retail customers who have a relationship which is understood by the financial services business.

With regard to tax, in November 2002, Guernsey fulfilled its OECD commitment to fiscal transparency by announcing a plan to introduce a zero rate of corporation tax for companies by 2008. Guernsey's announcement followed the Isle of Man's commitment to introduce a zero rate by 1 January 2006, although in both cases, financial service companies are obliged to pay a higher rate. Laurie Morgan stressed that there are no negative implications for individual taxpayers attached to the move:

'We envisage a package which doesn't impinge on the individual,' he said, adding that it was absolutely necessary for Guernsey to follow the lead of other jurisdictions, both in terms of increasing competitiveness, and in order to comply with the European Union's code of business conduct over taxation: 'Ireland is going to 12.5% - that doesn't make 20% look very attractive any more. 20% is still a relatively low rate but it is now higher than the emerging rates from elsewhere - and we are in competition.'

Released from the clutches of the OECD, Guernsey still had to reckon with the EU's information-sharing initiative, and in May, 2002, was forced to follow Jersey in giving a conditional committment to join the scheme provided that its competitors also did so.

Then UK Chancellor Gordon Brown told the Ecofin council in Luxembourg that the agreement of both Channel Islands to comply with new EU rules marked "significant progress".

The EU's information-sharing plan was a substitute for the introduction of a withholding tax, which proved seemingly impossible to agree, but under the deal struck at Feira in 2000 it was dependent on the agreement of Switzerland, the US and key offshore financial centres to operate a similar plan. In July it began to seem that the US would refuse to go along, meaning that jurisdictions like Guernsey would be off the hook, no doubt to their great relief. But the EU was not to be denied, and in early 2003 agreed a Savings Tax Directive package despite the lack of agreement with Switzerland and the US.

In March 2003, Guernsey's Advisory and Finance Committee said that after undertaking a wide ranging consultation with all sectors of the finance industry on the options contained within the EU Draft Directive on Taxation of Savings, it had concluded that if and when the EU Tax Package was finally adopted it would recommend to the States to introduce a retention tax on EU resident individuals' savings interest.

As good as its word, Guernsey introduced the withholding tax when the STD came into force in July 2005.

In May, 2006, the US Treasury Department revealed that an exchange of letters between the United States and the States of Guernsey had been completed on March 30, 2006, thus bringing into force an agreement that allows for the exchange of information on tax matters between the United States and the States of Guernsey.

Following up on its tax oversight campaign in April 2008, the OECD welcomed two new bilateral arrangements for the exchange of information for tax purposes, between Guernsey and the Netherlands and between the Isle of Man and Ireland.

The OECD revealed that this brought to fourteen the number of such agreements signed since the beginning of 2007 by jurisdictions committed to work with OECD countries.

The OECD noted that “other negotiations” were ongoing and were expected to lead to further new agreements shortly.

In May 2008, though, the UK House of Commons Committee of Public Accounts published a report arguing that the Foreign and Commonwealth Office (FCO) was not doing enough to manage the risks arising from the UK's liability for the 14 Overseas Territories choosing to remain under British sovereignty, according to Edward Leigh, Chairman of the House of Commons Committee of Public Accounts.

Edward Leigh, Chairman of the Committee, observed that:

'In most of the Territories, the standards of regulation across areas such as banking, money laundering, insurance and securities are not as good as those in the Crown Dependencies. The FCO, actively supported by other relevant agencies, must do more to help the Territories, especially the smaller ones, strengthen regulation. Where necessary, this should include bringing in more UK investigators and prosecutors.'

The report, using evidence from the Foreign and Commonwealth Office and the Department for International Development, examined the oversight of offshore financial services in the Territories; the balance between UK and Territory funding and responsibilities; and governance and management of the Territories' external relations.

While the report noted that the UK government is attempting to increase capacity for oversight of Territories' financial services industries, it argued that regulatory standards in most Territories are not yet up to those in the Crown Dependencies (Jersey, Guernsey and the Isle of Man).

It also found that limited capacity reduced the ability of Territories to investigate and prosecute money laundering.

Echoing this, in late June 2008, the Commons Select Committee on Foreign Affairs in the UK published its seventh report addressing issues surrounding overseas territories and offshore centres.

On the subject of the regulation of offshore financial services, the Commons Select Committee (CSC) observed that the UK has strong reasons to ensure that Overseas Territories' financial industries are well regulated.

According to the Committee report, Bermuda, the British Virgin Islands (BVI) and the Cayman Islands were the largest financial centres. Bermuda is the international leader in insurance, BVI is a leading global player in licensing international business companies, and the Cayman Islands are a leading world player in financial services, particularly banking and hedge funds.

In addition to this, the CSC reported that it had received mixed evidence about the quality of financial regulation in these Territories.

It was found that Bermuda, BVI, the Cayman Islands, and Gibraltar, were "leaving in their wake the weaker regulatory capacity" of these three financial centres, according to the report.

The report further announced that the Public Accounts Committee had concluded that the FCO, the Financial Services Authority, the Treasury and the Serious Organised Crime Agency, needed to "deploy their expertise and capacity jointly to manage the risks better".

In particular it highlighted a lack of investigative capacity properly to scrutinise suspected money laundering activity.

In an unwelcome revisitation of the Savings Tax Directive in September 2008, meanwhile, the European Commission announced its intention to tighten the rules of the legislation and consequently close existing loopholes and prevent tax evasion.

Germany led the onslaught to review the directive perturbed by the numbers of German investors avoiding tax by pouring millions of euros into investment vehicles which fall outside the scope of the rules, particularly in neighbouring Liechtenstein and Switzerland.

EU Tax Commissioner Laszlo Kovacs was due to issue a formal proposal by November outlining the amendments. However, as in all EU tax matters, in order to ensure that the proposal is adopted, the unanimous backing of all 27 member states would be required.

In July, 2009, HM Treasury in the United Kingdom issued a statement welcoming Guernsey’s progress in signing agreements on the exchange of information, which is strengthening its reputation as a jurisdiction committed to good governance in tax matters.

Guernsey had recently concluded its fourteenth Tax Information Exchange Agreement, signed with New Zealand on July 21, and also has agreements with the following jurisdictions: Denmark, Faroe Isles, Finland, France, Germany, Greenland, Iceland, Ireland, Netherlands, Norway, Sweden, United Kingdom, United States.

The United Kingdom also recognised Guernsey’s commitment to international standards of anti-money laundering legislation and practice, counter terrorist financing legislation and financial regulation, and also commended Guernsey’s participation in international efforts to combat financial crimes.

In December, 2009, the Guernsey Financial Services Commission proposed changes to its AML/CFT (anti-money laundering and countering the financing of terrorism) legislation.

The changes will require postage stamp dealers, bullion dealers, firms of accountants which are currently not registered with the Commission, and firms (including sole practitioners) of insolvency practitioners, auditors and tax advisors to register with the Commission and to comply with the AML/CFT regulations, and with the rules in the Commission’s handbooks.

As the Commission is conscious that the requirements of the regulations may appear complex and onerous, especially to firms which have not previously been subject to any form of AML/CFT regulation or supervision, the guidance note provides information to assist such firms.

In April, 2010, the Guernsey Financial Services Commission announced the launch of a consultation on proposals to overhaul legislation that governs the prevention of money laundering and the financing of terrorism in the island.

The consultation paper proposes extensive amendments, namely to the following legislation:

• The Financial Services Commission (Site Visits) (Bailiwick of Guernsey) Ordinance, 2008;
• The Insurance Business (Bailiwick of Guernsey) Law, 2002;
• The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002;
• The Protection of Investors (Bailiwick of Guernsey) Law, 1987;
• The Banking Supervision (Bailiwick of Guernsey) Law, 1994;
• The Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law, 2008;
• The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000;
• The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007; and
• The Criminal Justice (Proceeds of Crime) (Legal Professionals, Accountants and Estate Agents) (Bailiwick of Guernsey) Regulations, 2008.

The first part of the consultation discusses harmonizing the Commission’s on-site inspection powers throughout all governing legislation.

The definition of “regulatory laws” is also to be amended to provide a consistent definition across governing legislation. In particular this will improve the Commission’s checks when considering a license, by broadening the pool of relevant contraventions of regulatory laws that the Commission may take into account when considering an application.

It is also proposed that a textual amendment be made to legislation which governs penalties, namely harmonizing the texts of Section 88 of the Insurance Business Law, 2002 and Section 65 of the Insurance Managers and Insurance Intermediaries Law, 2002.

In addition, as part of a larger review of the definition of “FSB Regulations,” the Commission proposes inserting a new provision into the FSB Regulations which enables financial services businesses to disclose information to other financial services businesses and prescribed businesses, where it appears necessary for the purposes of forestalling, preventing or detecting money laundering and terrorist financing. This amendment is supported by the recommendation in recent IMF reports of other jurisdictions that they should consider including explicit provisions to provide for the sharing of information between financial services businesses.

In July, 2010, the Guernsey government noted the recent signing of a Tax Information Exchange Agreement (TIEA) with Portugal, concluded in London.

The agreement was signed by Guernsey’s Chief Minister, Lyndon Trott and the Portuguese Secretary of State for Tax Affairs, Sergio Vasques at the Portuguese Embassy in London on July 9.

Under the terms of the TIEA, Guernsey will, on request, exchange bank and other information relating to both criminal and civil tax matters.

The signing of the latest agreement for Guernsey brought the territory’s tally of agreements that are compliant with the Organization for Economic and Cooperation Development’s internationally-agreed standard to sixteen.

The island has already been recognized for its commitment to tax transparency through information exchange in its April 2009 inclusion on the G20’s ‘white list’ of 'territories that have substantially implemented the internationally-agreed standard.'

Commenting, Trott, said: “Our recognition by the G20 was an important milestone for Guernsey’s future as a premier international financial centre, but we have not stopped there. Guernsey is committed, not only to ensuring that it has completed its programme of entering into tax information exchange agreements with all its significant trading partners, but also to ensuring the prompt and effective implementation of these agreements.”

In the same month, Guernsey's Chief Minister, Lyndon Trott, announced a date for the introduction of an automatic exchange of information regime in the island, which will allow for the transmission of information relating to interest income earned by EU-resident individuals to their home authorities.

The introduction of such a regime is a move towards greater tax transparency, abolishing the existing option to pay a withholding tax on interest income, avoiding disclosure.

Drawing on the results of a consultation, carried out by the Fiscal and Economic Policy Group in this summer, Trott announced: “In light of the views expressed by members of industry and industry bodies, and given the States’ commitment to maintaining the highest standards of tax transparency, the Fiscal and Economic Policy Group recommended to Policy Council that institutions in Guernsey should move to automatic exchange of information from January 1, 2011, and no later than July 1, 2011. This ‘from but by’ transition period is to provide the maximum flexibility to our industry in making their necessary adjustments to their payment systems,” he explained.

According to the Guernsey government, a report on the introduction of the automatic information exchange regime will be submitted to the States of Guernsey in the early autumn to confirm arrangements for the move.

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